Who paid $300,000 for this "structure".

Special report: Flipping, flopping and booming mortgage fraud

(Reuters) – The house on the 53rd block of South Wood Street in Chicago’s Back of the Yards doesn’t look like a $355,000 home. There is no front door and most of the windows are boarded up.

Public records show it sold in foreclosure for $25,500 in January 2009, then resold for $355,000 in October. In between, a $110,000 mortgage was taken out on the home, supposedly for renovations. This June, the property went back into foreclosure.

To Emilio Carrasquillo, head of the local office of non-profit lender Neighborhood Housing Services of Chicago (NHS), the numbers don’t add up. He believes this is a case of mortgage fraud.

It may not make the blood boil like murder or rape, but mortgage fraud is a crime that cost an estimated $14 billion in 2009 and could be hampering an already fragile recovery in the housing market. The FBI has been fighting back, assembling its largest ever team to fight it. They have their work cut out for them, though, as a tsunami of foreclosures is making classic scams easier and spawning new ones to boot.

“There’s no way any property in this neighborhood should sell for that kind of money,” said Carrasquillo, standing outside the house on Wood Street in this poor, predominantly black area of Chicago’s South Side. “Even if it was in great condition.”

Carrasquillo has identified a number of properties in Back of the Yards that sold for between $5,000 and $30,000 last year and then came back on the market for up to $385,000. He said property prices are being artificially inflated, allowing fraudsters to walk away with vast profits and making it harder for honest local people to buy a home.

Mortgage fraud takes many forms, but a well-organized scam frequently involves a limited liability company (LLC) or a “straw buyer.” In

Who paid $355,000 for this structure?

this scheme, fraudsters use a fake identity or that of someone else who allows them to use their credit status in return for a fee. The seller pockets the money the buyer borrows from a lender to pay for the home. The buyer never makes a mortgage payment and the property goes into foreclosure.

In other words, the money simply disappears, leaving the lender with a large loss. Since the U.S. government is now backing much of the mortgage market in the absence of private investors, that means “taxpayers are ultimately on the hook for fraud,” said Ann Fulmer, vice president of business relations at fraud-prevention company Interthinx.

Back of the Yards was hit by fraud during the housing boom and Carrasquillo says the glut of foreclosures is now making it easier for scammers to pick up properties for a song and flip them for phenomenal profits.

Drug dealers and gang members have taken over abandoned houses, many adorned with spray-painted gang signs. Prior to touring the area, Carrasquillo attached two magnetic signs touting the NHS logos on his minivan’s doors to show he is not a police officer. He said he also prefers touring in the morning, as drug dealers and “gangbangers” tend not to be early risers.

“These properties are just going to sit there, boarded up, broken into and a magnet for crime,” he said. “And that makes our job of trying to stabilize this neighborhood so much harder.”

CRACKDOWN NETS MORE REPORTS OF FRAUD

The U.S. Federal Bureau of Investigation said in a report released on June 17 that suspicious activity reports (SARs) related to mortgage fraud rose 5 percent in 2009 to around 67,200, up from 63,700 the year before. The number had tripled from 22,000 in 2005 and the number of SARs for the first three months of 2010 hit nearly 38,000.

“We don’t see the number declining while foreclosures remain so high,” said Sharon Ormsby, section chief of the FBI’s financial crimes section.

Robb Adkins, executive director of the Financial Fraud Enforcement Task Force, is known as U.S. President Barack Obama’s financial fraud czar. He describes mortgage fraud as “pervasive” and fears it is exacerbating the nation’s real estate woes. “That, in turn, could act as an anchor on the economic recovery,” he said.

For the housing market to recover, potential homeowners need confidence in home prices and investors need confidence to get back into the secondary mortgage market, Adkins explained.

Since the subprime meltdown, a wide variety of scams have come to the fore. They include big cases like that of Lee Farkas, the former head of now bankrupt mortgage lender Taylor, Bean & Whitaker Mortgage Corp, charged in June with fraud that led to billions of dollars of losses. The scheme involved the misappropriation of funds from multiple sources, including a lending facility that had received funding from Deutsche Bank and BNP Paribas.

That appears to be the scam of choice. On July 22, for instance, seven defendants were indicted in Chicago in a $35 million mortgage fraud scheme involving 120 properties from 2004 to 2008 using straw buyers. Of the half dozen properties listed in the indictment, two were in Back of the Yards.

In the mid-2000s, the availability of easy money, poor due diligence by lenders and low- or no-documentation loans, acted as a magnet for fraudsters, who used identity theft and other scams to bag large sums of cash.

“During the boom it was almost like people in the real estate market could do no wrong,” said Ohio Attorney General Richard Cordray. “As ever more money rushed in, it attracted a lot of people who engaged in shady behavior.”

Instead of leaving them without a market, the crash has instead provided fraudsters with a glut of foreclosures, stricken borrowers and desperate lenders to take advantage of.

“There were plenty of opportunities for fraud on the way up and there are plenty on the way down,” said Clifford Rossi, a former chief credit officer at Citigroup and now a teaching fellow at the University of Maryland in College Park.

Alongside familiar scams like property flipping, the crash has added new terms to the lexicon: short sale fraud, builder bailouts and flopping. Rescue scams targeting struggling homeowners with false promises of help are also on the rise.

If some of the mechanisms are new, a lot of the fraudsters are not: in many cases, they turn out to be mortgage brokers, appraisers, real estate agents or loan officers. “Because they’re insiders, they see exactly what’s happening and they’re able to stay one step ahead of the game,” said Todd Lackner, a fraud investigator in San Diego. “They’re the same people who were committing fraud during the boom and they were never caught or prosecuted.”

BACK TO THE YARDS

Just a stone’s throw from downtown Chicago, Back of the Yards is the setting for Upton Sinclair’s classic 1906 novel “The Jungle,” a tale of grueling hardship and worker exploitation at the city’s stockyards. The book includes an act of mortgage fraud against an unsuspecting Lithuanian family.

“Mortgage fraud is nothing new,” said Christopher Wagner, co-managing attorney of the Ohio Attorney General’s Cincinnati office. “It’s been around for a long time.”

Saul Alinsky, considered the founder of modern community organizing, started out in Back of the Yards in the 1930s. Decades later, a young community organizer named Obama got his start near here.

The neighborhood has always been poor, but south of the old railway tracks at W 49th St, the housing crisis’ legacy of empty lots and boarded-up homes is evident on every block. There are few stores and services available — in four separate visits for this story, no police vehicles were sighted.

“This is what we refer to as a ‘resource desert,'” Carrasquillo said. “When no one pays attention to an area like this, it makes it easier to get away with fraud.”

Marni Scott, executive vice president for credit at Troy, Michigan-based lender Flagstar Bancorp, says there are virtually no untainted sales in the area. “There are no cases of Mr and Mr Jones selling to Mr and Mrs Smith.”

“We see cases of mortgage fraud around the country,” she added. “But there’s nothing out there that could match the mass-production, assembly-line fraud that’s going on here.”

In 2008 Flagstar instituted a rule whereby any loan applications here and in parts of Atlanta — another fraud hot spot — must be approved by Scott and the lender’s chief appraiser. In a Webex presentation, Scott rattles through a number of properties snapped up for pennies on the dollar in 2009 and then sold for around $360,000.

She provides an underwriter’s-eye-view of one property, on the 51st block of South Marshfield Avenue, sold in foreclosure in July 2009 for $33,000. In January of this year Flagstar received a loan application to buy the house for $355,000.

The property appraisal — compiled by an appraiser who Scott believes never visited the area — showed four nearby comparable properties of around the same age (100 plus years) sold recently for around $360,000. The trick to this kind of scheme is engineering the sale of the first few fraudulently overvalued properties to get “comps” — comparable values — to fool appraisers and underwriters alike.

“Miraculously, all of these properties were all within a very narrow price range,” Scott said with weary sarcasm. “This is a perfect appraisal for an underwriter. If you are an underwriter sitting in Kansas or California it all looks fairly straightforward so you can just hit the button and approve it.”

Using a $5 product called LoanIQ from U.S. title insurer First American Financial Corp called LoanIQ, Flagstar determined the application itself was fraudulent and there was a foreclosure rate in the area of nearly 60 percent. What is more, property prices here spiked 84 percent last year after 44 percent and 26 percent declines in 2008 and 2007. [How mant times have you heard the MSM report that “Housing prices recovered 1% last month”]

“No neighborhood should look like this,” said Scott, who declined the application.

Last April, however, another lender approved a loan application for $335,000 on the same property from the same people.

FORECLOSURE MAGNET

Reports this year from Interthinx, CoreLogic Inc and the Mortgage Asset Research Institute (MARI) — which all provide fraud prevention tools for lenders — show foreclosure hotspots Florida, California, Arizona and Nevada are also big mortgage fraud markets.

MARI said in its April report that reported mortgage fraud and misrepresentation rose 7 percent in 2009, adding fraud “continues to be a pervasive issue, growing and escalating in complexity.”

Denise James, director of real estate solutions at LexisNexis Risk Solutions and one of the author’s reports, said reported fraud will continue to rise throughout 2010.

In its first-quarter report, Interthinx said its Mortgage Fraud Risk Index rose 4 percent to 151, the first time it had passed 150 since 2004. A figure of 100 on the index would indicate virtually no risk of fraud.

Congressman Barney Frank

According to various estimates, the 30310 ZIP code in Atlanta is one of the worst in the country. An analysis of that ZIP prepared for Reuters by Interthinx showed a fraud index of 414, making it the eighth worst ZIP code in the country. Back of the Yards — ZIP code 60609 — had an index of 309.

“In some neighborhoods in Atlanta there hasn’t been a clean transaction in 10 years,” Interthinx’s Fulmer said.

In 2005 local residents here formed the 30310 Fraud Task Force. Members sniff out potential signs of fraud — such as repeated property flipped — and report them directly to the FBI and local authorities. Information from the task force led to the arrest of a 12-member mortgage fraud ring on September 15, 2008 — better known in the annals of the financial crisis as the day Lehman Brothers filed for Chapter 11 bankruptcy protection.

Brent Brewer, a civil engineer and task force member, said the arrests had a noticeable impact on fraud in the area. “It made a statement that if you come here to commit fraud there’s a good chance you’ll get caught,” he said.

But Brewer harbors no illusions the fraudsters are gone. “There’s no way they can catch everyone who’s involved in fraud. But if you’re dumb, greedy or desperate, you’re going to get caught.”

FBI GETTING INTERESTED

Law enforcement has come a long way in combating mortgage fraud, though officials freely admit that’s not saying much.

Senator Chris Dodd

Ben Wagner, U.S. attorney for the eastern district of California, said as mortgages are regulated at the state and local level, for years there was little federal interference. Prior to the recent boom, he said, fraud simply “was not identified as a huge problem.”

“There has been a little bit of a learning curve,” Wagner said. “This was not something federal prosecutors had much familiarity with. Now we’re getting pretty good at it.”

Half of Wagner’s 50 or so criminal prosecutors focus on white-collar crime including fraud. Two new prosecutors will be dedicated solely to mortgage fraud.

Now mortgage fraud is a known quantity, Wagner said all U.S. prosecutors tackling it are linked by Internet groups. The May edition of the bi-monthly “United States Attorneys’ Bulletin” (published by the Executive Office for United States Attorneys) was devoted entirely to mortgage fraud.

The FBI has more than 350 out of its 13,000 agents devoted to mortgage fraud. There are also now 67 regular mortgage fraud working groups and 23 task forces at the federal, state and local level. “This is the broadest coalition of law enforcement ever brought together to fight fraud,” Adkins said. He admitted, however that limited resources to fight fraud still pose a challenge.

Attorney General Eric Holder

In June U.S. authorities said 1,215 people had been charged in a joint crackdown on mortgage fraud. Many of the charges were for crimes committed years ago.

Latour “LT” Lafferty, the head of the white-collar crimes practice at law firm Fowler White Boggs in Tampa, Florida, said fraud in the boom was so pervasive that many crimes will go undetected and unprosecuted. “Everyone had their hands in the cookie jar during the boom,” he said. “Lenders, brokers, Realtors, homeowners … everyone.”

OLD DOG, NEW TRICKS

A new mortgage scam born out of the housing crisis is short sale fraud. Short sales are a way for stricken homeowners to get out of their homes, whereby in agreement with their lender they sell their home for less than they paid for it and are forgiven the remainder.

But they have also proven a tempting target for fraudsters, usually involving the Realtor in the deal. Lackner, the fraud investigator in San Diego, described a typical scheme: “Let’s say you have a property up for short sale that you know as a Realtor you can get $350,000 for,” he said. “But you arrange a low-ball appraisal of $200,000 and have someone make an offer of that amount.”

Tont Rezko - Convicted Felon - Real Estate "Development"

“The Realtor says to the bank this is the best offer you’re going to get, take it or leave it,” he added. “Then they turn around and flip it immediately for $350,000. In cases like this, the lender is probably already stuck with a lot of foreclosed properties and doesn’t want more. So they go for it.”

Where the process of fraudulent appraisals overvaluing a property for sale is “flipping,” deliberately undervaluing them has become known as “flopping.”

Bob Hertzog, a designated real estate broker at Summit Home Consultants in Scottsdale, Arizona, says he gets emails from unknown firms offering to act as a “third-party negotiator” between the seller and the bank with what turns out to be a grossly undervalued bid.

Hertzog has tried tracing some of the LLCs, but describes a chain of front companies leading nowhere.

“The problem is it is so cheap and easy to set up an LLC online that sometimes they are set up for just one transaction,” Flagstar’s Scott said. “And if they’re set up using fake information or a stolen identity, it’s very hard to trace who’s behind them.”

Many web sites boast they can help you form an LLC online for under $50.

Another common target for fraud is the reverse mortgage. Designed for seniors to release equity from a property, according to financial fraud czar Adkins, they have been used to commit a “particularly egregious type of fraud.”

Fraudsters commonly forge their victims’ signatures and, without their knowledge or consent, divert funds to themselves. The scam is worst in Florida, a magnet for American retirees.

“Unfortunately it is often not until the death of the victim that their heirs realize that all of the equity has been stripped out of the property by fraudsters,” Adkins said.

But Arthur Prieston, chairman of the Prieston Group, which sells mortgage fraud insurance and has launched a patented system to rate lenders on the quality of their loans, said most mortgage fraud he comes across consists of ordinary people fudging figures to get a loan. “The vast majority of the fraud we see is where people intend to occupy a property, but can’t qualify for a loan,” he said. “They’ll do anything to get that loan approved.”

He added this is achieved with the active collusion of Realtors, brokers and lenders looking to make a sale and keep the market moving. Before his firm issues fraud insurance it reviews a lender’s loans and between 20 percent and the 30 percent of the loans reviewed so far have had “red flags.”

The problem with assessing the extent of the damage caused by mortgage fraud is that it’s not just the dollar amount of the fraud itself. It also hits property values, property taxes and often causes crime to rise.

“Most people interpret white collar crime as a victimless crime, where the bank pays the price and no one else,” said Andrew Carswell, associate professor of housing and consumer economics, University of Georgia. “This is a mistaken perception … neighborhoods and homeowners pay the price.”

UNCOVERING THE SCAMS

Companies like Interthinx, CoreLogic and DataVerify all have data-driven fraud prevention tools for lenders. Interthinx’s program, for instance, identifies some 300 “red flags” including a buyer’s identity and recent sales in a neighborhood, while CoreLogic uses pattern recognition technology. CoreLogic also aims to bring a short sale fraud product to the market soon.

Interthinx’s Fulmer said regardless of the source, on average solid fraud prevention tools can be had for as little as $10 to $15 per loan. “The tools out there enable us to see what’s going on out there right now in real time,” she said.

Apart from fraud insurance, Prieston Group’s new credit rating system for lenders should have enough data within the next year to start providing valid ratings.

Prieston said the firm’s insurance product is growing at more than 100 percent per month, while CoreLogic’s Tim Grace said the firm’s fraud prevention tool business was booming.

Many lenders are also sharing more information about bad loans, though LexisNexis’ James said it is not nearly enough. “If lenders don’t start to share more information then fraudsters will continue to go from bank to bank to bank until they’re caught,” she said.

The University of Maryland’s Rossi said what the industry needs is a “central data warehouse” to combat fraud. “There has been a failure of collective data warehousing across the industry,” he said.

Mortgage Bankers Association (MBA) spokesman John Mechem said members have no plans for a central database, but added “we view our role as being to facilitate and encourage information sharing in the industry.”

The U.S. Patriot Act of 2001 allows lenders a safe harbor to share information, but does not mandate it. “We always encourage more information sharing,” said Steve Hudak, a press officer at the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCen. “As of now, however, this is an entirely voluntary process.”

But Rossi said the government should step in. “The Federal government is probably going to have to take the initiative because I don’t see the industry doing this one on its own,” he said. “I am personally not a fan of big government, but we need more information sharing.”

Ultimately, the expectation is lenders will be forced either to improve due diligence, or face being pushed out of business as investors burned by sloppy underwriting during the boom urge them to adopt fraud prevention tools.

“Investor scrutiny is going to be higher than it ever has been,” Rossi said. “The days of a small amount of due diligence are gone.”

Many investors are also investigating their losses and forcing lenders to repurchase bad loans. This is resulting in “thousands of repurchases a month,” according to Prieston.

“When it comes to small lenders with only a few million dollars of loans, ten repurchases will absolutely put some of them out of business,” he said.

The government now guarantees more than 90 percent of the mortgage market and forms almost the entire secondary mortgage market, as private investors have not returned. The FHA, Fannie Mae and Freddie Mac are thus seen as playing an instrumental role in pushing improved due diligence to clean up the government’s multi-trillion dollar portfolio.

FHA commissioner David Stevens was appointed in July 2009. Since then the FHA has shut down 1,100 lenders, after decades in which the government closed an average of 30 lenders annually. He says most lenders he deals with are of a “very high quality,” but that “there are still lenders that either don’t have controls in place or are proactively engaging in practices that pose a risk to the FHA.”

Stevens does not expect to shut down lenders at the same rate as the past year, but added “the number will be much higher than the historical average.”

CoreLogic’s Grace said most large lenders have the tools in place to combat mortgage fraud, but admitted he was concerned about some smaller lenders. “The next shakeout of weak lenders will take place over the next 12 to 24 months,” he said.

The MBA’s Mechem said the U.S. mortgage market must be cleaned up if it is ever to return to normal. “The one thing private investors need to get back into the secondary market is confidence,” he said. “And investors won’t risk buying mortgages if they don’t have confidence in the quality of the loans. Restoring that confidence is going to play a pivotal role in restoring the markets.”

In the meantime, mortgage fraud is expected to cause more problems in areas like Back of the Yards in Chicago.

Three doors down from the boarded-up, foreclosed property that has aroused Carrasquillo’s suspicions, father-of-three Oti Cardoso says he and his neighbors try to cut the grass at the abandoned properties on his block and to keep thieves out. But he has heard most empty houses end up occupied by gang members.

“I want my children to be safe, I don’t want drug dealers here,” he said. “I have tried to find the owner of these houses so I can work with them to help keep their homes clean.”

“If they only knew what was happening here,” he added, “I’m sure they would want to do what was right.”

As we all know the were two things that created our current economic turmoil, reckless government spending that we couldn’t afford and reckless lending in the mortgage market. The bad mortgages were then packaged and sold as investment securities destroying 401’s and bank accounts all over the world.

Every day you’ll hear about the need for more regulation – That simply isn’t so – what we need is less Government spending and an end to reckless mortgage lending.

Get ready for the next round of “sub-prime mortgages”, Obama and the Democarts want to “double down” and increase the number of “high risk” mortgages funded through Fannie Mae and Freddie Mac.

Freddie Mac and Fannie Mae were the first of the bailout babies – you and I and all of the other taxpayers in this Country have been gouged for about 7 Trillion dollars to buy up the earlier batch of “bad mortagges” these entities created.

So what is Fannie Mae and Freddie Mac up to now?

Obama Seeks To Refinance More Underwater Mortgages

July 1, 2009 1:04 PM EDT

According to various reports, the Obama administration is stepping up their efforts to stem foreclosures and will start refinancing mortgages with a loan-to-value of as much as 125% through Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The previous loan-to-value was 105%.

So, now the Government plans on leneding up to $300,000 on homes worth only $240,000. (Plesae note that the average price of a U.S. home this month is $178,000).

Where does this money come from – Your Tax Dollars.

For those of you who are asking, “So what does this mean?”, the answer is this. The Government will now fund mortgages to those who are underwater or indefault, with taxpayer funds, and allow the individuals to obtain loans that are, as the example above states, worth substantially more than the homes being mortgaged are worth.

The riskiest of all of the sub-prime mortgages were those made with no down payment and where the loan to value was above 80%. The very worst were the 125% LTV loans.

Are you asking, and what happens when the person re-defaults in 6 months and walks away with the $60,000 above the home’s value? Answer – THE AMERICAN TAXPAYER IS ON THE HOOK FOR THE MORTGAGE.

This is a receipt for deepening the current crisis – not resolving it.

The answer isn’t additional “regulation”. The Government is “regulating” that this be done.

I’m sure you’ve seen the following headline or heard the “sound bite” over your radio or from your local news anchor, “Record 1-in-10 Americans in mortgage trouble”. Before we examine this sad statistic, we should note that 9 out of 10 homeowners are not “in trouble”. http://www.msnbc.msn.com/id/28069420

Exactly what do the authors of this article have to say, well consider this, “The Mortgage Bankers Association said Friday the percentage of loans at least a month overdue or in foreclosure was up from 9.2 percent in the April-June quarter”. Please note 2 items, the article does not state how much of an increase has taken place since the April to June quarter, nor do the authors note that 9.2% would, in fact, represent 1 in 10 home owners. http://www.msnbc.msn.com/id/28069420

What is not being discussed is this fact, “[The] delinquency rates for traditional 30-year fixed rate loans made to borrowers with strong credit loans rose to 3.35 percent in September from 3.07 percent at the end of June.” http://www.msnbc.msn.com/id/28069420

The 30 year historical default rate for 30 year fixed mortgages is 3.2 percent. The 30 year “fixed” mortgage has always been referred to as a “traditional mortgage”. It was not until the advent of LIAR LOANS and NINJA Mortgages that this country saw the development of the “Sub-prime” market. The authors of this article imply that “strong credit” is required for a 30 year fixed rate mortgage, for most of the last 75 years one has had to simply prove an ability to “repay” ones mortgage and to have saved a “down payment” to qualify.

Two out of every three mortgages currently “in trouble” are of the “sub-prime” variety. A “sub-prime” mortgage is 700% more likely to go into “default” or “foreclosure” that a “traditional mortgage”.

Once again the pundits have the “cart before the horse”. The economy is being ruined by the reckless lending practices created by the Government when it forced LIAR & NINJA loans on the banking community. The percent of “traditional mortgages” that end up “in trouble” or “default” or “foreclosure” has not changed substantially over the last 50 years.

The mortgage crisis is centered on the “sub-prime” mortgage market. The “sub-prime market is responsible for 2 out of 3 “defaults” or “foreclosures”. Many of these sub-prime mortgages were given to people who should not have received them in the first place.

If we are not truthful about the cause of our problems, we will never correct our mistakes ……….

PELOSI CONFIRMS HOUSE REPUBLICAN BOYCOTT – A BOYCOTT McCAIN BROUGHT TO AN END – EXPOSES DEMOCRATIC LIES ABOUT NEGOTIATIONS

How can you believe anything that comes out of Democrat’s mouth these days. No wonder the old joke has been around so long – How can you tell when a Democratic Politician is lying – their lips are moving.

Earlier this weekend the Democrats rushed to the podium and announced to the Press “WE HAVE A DEAL”. That proclamation was a “bold face lie“.

Then the Democrats claimed – McCain “blew-up” the non-existent agreement – a lie upon a lie.

The fact that the Republican House was boycotting the negotiations went nearly unreported. The Democratic Spin was the third lie – Democrats claimed the hold up hand something to do with “Executive Compensation” and “John McCain”. The truth – the Congressional Republican Caucus challenged Democratic attempts to flood the Bailout with additional spending and, how dare they, question whether the Paulson Bailout Plan, was in the best interests of the American Public. Should $700 Billion of Main Street’s Money be spent on Wall Street? How dare the Republicans ask that question?

Late Friday night Democratic Congressman Barney Frank exposed the Democratic lie when he acknowledged that the House Republicans were Boycotting negotiations and had been boycotting the negotiations for days before McCain arrived back in Washington. McCain’s trip to Washington highlighted the boycott and changed the basic nature of negotiations. How could the Democrats dare to claim an “agreement” when the House Republicans were not even participating in the negotiations –

Today Pelosi confirmed the Republican Congressional Boycott and while doing so confirmed her lies concerning “A DEAL” this past Friday. Pelosi condemned the Repubican’s for boycotting the earlier negotiations and called the Republicans “unpatriotic” for looking out for the American tax payors while they challenged “The Paulson Bailout”.

Pelosi shouldn’t count her chickens before they hatch – the House Republicans have not committed to vote for the current proposal – in fact the final language is just being drafted as this post is being typed,

Contact Senator Pelosi and let her know what you think about her “un-patriotic” claim –

By STAN LIEBOWITZ

February 5, 2008

PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards – done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis’ core are loans that were made with virtually nonexistent underwriting standards – no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards – at the behest of community groups and “progressive” political forces.

In the 1980s, groups such as the activists at ACORN began pushing charges of “redlining” – claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications – but the overwhelming reason wasn’t racial discrimination,but simply that minorities tend to have weaker finances.

Yet a “landmark” 1992 study from the Boston Fed concluded that mortgage-lending discrimination was systemic.

That study was tremendously flawed – a colleague and I later showed that the data it had used contained thousands of egregious typos, such as loans with negative interest rates. Our study found no evidence of discrimination.

Yet the political agenda triumphed – with the president of the Boston Fed saying no new studies were needed, and the US comptroller of the currency seconding the motion.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.”

Some of these “outdated” criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant’s ability to manage debt.

Sound crazy? You bet. Those “outdated” standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with “100 percent financing . . . no credit scores . . . undocumented income . . . even if you don’t report it on your tax returns.” Credit counseling is required, of course.

Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed “the most flexible underwriting criteria permitted.” That lender’s $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.

Who was that virtuous lender? Why – Countrywide, the nation’s largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.

In an earlier newspaper story extolling the virtues of relaxed underwriting standards, Countrywide’s chief executive bragged that, to approve minority applications that would otherwise be rejected “lenders have had to stretch the rules a bit.” He’s not bragging now.

For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage caused by relaxed lending standards.

This damage was quite predictable: “After the warm and fuzzy glow of ‘flexible underwriting standards’ has worn off, we may discover that they are nothing more than standards that lead to bad loans . . . these policies will have done a disservice to their putative beneficiaries if . . . they are dispossessed from their homes.” I wrote that, with Ted Day, in a 1998 academic article.

Sadly, we were spitting into the wind.

These days, everyone claims to favor strong lending standards. What about all those self-righteous newspapers, politicians and regulators who were intent on loosening lending standards?

As you might expect, they are now self-righteously blaming those, such as Countrywide, who did what they were told.

Stan Liebowitz is the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas.

It may have taken years to get any publicity about the loans nicknamed “NINJA” (No Income, No Job, No Assets) and LIAR (where a lender does not require “documentation” of employment, income or credit history) but now that these loans have been publicized one might imagine that the Congress would “prohibit” lending institutions from continuing to follow the practices that allowed these loans to be issued.

If you assume that such a prohibition would be included in a $700 Billion bailout, your wrong.

The Boston Federal Reserve wrote a Manual to provide “Mortgage Underwriting Guidelines”. Those guidelines “loosened” the traditional practices used to determine who qualified for a mortgage and how much they could borrow. READ THE INTERESTING STORY HERE: http://www.foxnews.com/story/0,2933,424945,00.html

Fannie Mae and Freddie Mac actually used these guidelines to threaten banks with litigation if they did not adopt the ideologically developed guidelines. You might ask which banks were the biggest supporters – you could start with Countywide and run down the list to Bear Stearns. They are all gone now and we, the Taxpayers, are being asked to pick up the bill …. http://www.foxnews.com/story/0,2933,424945,00.html

The Democrats refuse to acknowledge that “NINJA” and “LIAR LOANS” need to end – They won’t admit that there great ideologic experiment has failed.

While there may have been all sorts of other horrendous behaviors associated with this Crisis, the Crisis started with handing out bad loans.

If we don’t stop handing the bogus loans that caused this Crisis in the first place, Congress might as well throw our $700 Billion down a rat hole.

To use a medical anology – the proposed “Bailout” treats the patients symptoms but not the illness. The patient will look better, but the disease will kill the patient if the real disease isn’t treated. You can’t cure a cancer with aspirin.

Contact Your Congressperson & Senator And Tell Them No More NINJA Or LIAR LOANS:

CLEARWATER, Fla. — Democrat Barack Obama said Tuesday any plan to rescue Wall Street from its financial woes must ensure that taxpayers are reimbursed and corporate executives are not further enriched for mismanagement.

Obama outlined several principles that he said should be included in the bailoutto ensure that troubled financial firms and their executives don’t take advantage of taxpayers.

1).Companies that take financial aid from the government must slash their executives’ salaries, he said. 2).Taxpayers must be treated like investors who can share in any Wall Street recovery, perhaps with an ownership stake in the companies that are bailed out, and a 3).new fee on financial services should be created to repay the government aid.

4). “This plan cannot be a welfare program for Wall Street executives,” he said at a news conference.

Is that it? The Obama Plan! After taking a week he says; cut executives salaries, make taxpayers investors, add fees on the services and “no welfare for Wall Street”, whatever that means.

I thought this guy went to Harvard.

This isn’t a plan – it is 4 short sound bites run together.

Did Obama really put this togther or is it a media creation? A creation cobbled together by Obama’s supportive media who were embrassed that Obama hadn’t produced a plan one week into this news cycle?

How do we stop this so called crisis from happening again? When is Obama going to quit blaming de-regulation for the mess? Is Obama in favor of continuing NINJA and LIAR Loans? Is Obama in favor of increasing the underwriting standards for mortgages? Will Obama now support the additional regulation suggested by John McCain in 2002 & 2006? Will Obama now support the reforms the Bush Administration asked for?